Call Systems Company, a telephone service and supply company, has just completed its fourth year of operations

Call Systems Company, a telephone service and supply company, has just completed its fourth year of operations. The direct write-off method of recording bad debt expense has been used during the entire period. Because of substantial increases in sales volume and the amount of uncollectible accounts, the company is considering changing to the allowance method. Information is requested as to the effect that an annual provision of 1% of sales would have had on the amount of bad debt expense reported for each of the past four years. It is also considered desirable to know what the balance of Allowance for Doubtful Accounts would have been at the end of each year. The following data have been obtained from the accounts:

Year of Origin of Accounts Receivable Written Off as Uncollectible Year Sales Uncollectible Accounts Written Off 1st 2nd 3rd 4th 1st $   900,000 $ 4,500 $4,500 2nd 1,250,000 9,600 3,000 $6,600 3rd 1,500,000 12,800 1,000 3,700 $8,100 4th 2,200,000 16,550 1,500 4,300 $10,750 Instructions 1. Assemble the desired data, using the following column headings: Bad Debt Expense Year Expense   Actually Reported Expense Based on   Estimate Increase (Decrease) in Amount  of Expense Balance of Allowance Account, End of Year

2.  Experience during the first four years of operations indicated that the receivables either were collected within two years or had to be written off as uncollectible. Does the estimate of 1% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years? Explain.

Answer:

1.

Increase Balance of

Expense Expense (Decrease) Allowance

Actually Based on in Amount Account,

Reported Estimate of Expense End of Year

$ 4,500 $ 9,000 $4,500 $ 4,500

9,600 12,500 2,900 7,400

12,800 15,000 2,200 9,600

16,550 22,000 5,450 15,050

2. Yes. The actual write-offs of accounts originating in the first two years are 

reasonably close to the expense that would have been charged to those years 

on the basis of 1% of sales. The total write-off of receivables originating in 

the first year amounted to $8,500 ($4,500 + $3,000 + $1,000), as compared to bad

debt expense, based on the percentage of sales, of $9,000 ($900,000 × 1%). For

the second year, the comparable amounts were write-offs of $11,800 ($6,600 + 

$3,700 + $1,500) and bad debt expense of $12,500 ($1,250,000 × 1%).